There is increasing pressure on DFMs to reduce costs, but the focus on headline rates is all wrong.
Of the 69 discretionary fund management (DFM) model portfolio offerings FinalytiQ looked at recently, only 10 had all expenses included in the headline rate.
How can advisers justify putting clients in a DFM proposition if the full cost of the service isn’t entirely clear?So, the assumption that a drop in headline rates would mean a reduction in overall costs may be inaccurate. In fact, this won’t be the case – expenses are simply piled in other areas. You need to add VAT, too, when you compare to, say, multi-managers.
Clients may be no better off than they were pre-RDR, and might even be much worse off. The all-in cost to the client for an actively-managed DFM portfolio may well touch on 3 per cent per year when you include the platform and advisory costs.
Given that cost is perhaps the most important predictor of performance, and getting full cost disclosure from some managers is like pulling teeth, how can advisers justify putting clients in a DFM proposition if the full cost of the service isn’t entirely clear?
This is a basic fiduciary duty for any professional adviser. When we conduct due diligence of DFMs, transparency with costs is often a key point for us, and we tend to take the view that, if they are not being entirely clear with their costs, it’s hard to trust them in many other areas.
Abraham Okusanya is the principal at FinalytiQ
